The faith of some countries and particular governments is tied to that of resource availability. Such argument has been used to explain Chavez’s rhetoric, and undemocratic practices in the Middle East. It is true that oil and gas reserves do not fully explain either phenomena, but fossil fuels have granted in both occasion a special ingredient. Oil and gas reserves have also been the backbone of for development of many traditionally democratic countries, some of which found themselves in great trouble after World War II. One of those cases is Norway, where oil and gas discoveries have allowed for the continuation of a democratic regime, where important social policies share the profits made by an unregulated market. Nonetheless, Statoil (NYSE:STO) remains a majority state owned company with 67% of outstanding shares, and only 9.5% in the hands of private Norwegian investors. Attention is called upon the stock because the second largest guru holding shares in the firm has sold part of his investment after 3 years of strong cumulative behavior.
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- STO 15-Year Financial Data
- The intrinsic value of STO
- Peter Lynch Chart of STO
Planned slowdown and international operations
Statoil is one of the largest integrated oil and gas companies with operations in all relevant producing areas. Participating interests in production and exploration have expanded from the North Sea the Americas, North Africa and Southeast Asia, but 70% of the activities remain in the first region. Most importantly for any oil and gas firm, serious incident frequency and total recordable injury frequency continue on a downtrend since 2009.
When comparing overall performance on a year-over-year basis, Statoil shows a decline in 2013 due to lower prices and decreased production, mainly due to expected decline, divestments and redeterminations. However, the goals set for the period were met and no surprises affected the expected slowdown. For example, the company achieved a 128% of reserve replacement ratio, with a new record for organic reserve replacement ratio at 147%. Remarkable has been also the completed 59 exploration wells, 26 of which were discoveries.
Given that most producing operations for Statoil concentrate around Norway, and most capitals reside there, refineries have been located in several countries around the North Sea. And although the company continues to make a strong effort to increase its international exposure, it is not without risk. For example, operations in Libya, Algeria and Venezuela are greatly exposed to sabotage and state expropriation.
Indicators and expectations
Statoil currently trades at 13.3 times its trailing earnings, carrying a 12% premium to the industry average. Nonetheless, the operating margin recorded more than doubles the industry average. The firm has also eliminated debt during the last year, reason for the overall slowdown that implied a reduction in revenue and net income, while surprisingly increasing cash flow. Additionally, the stock pays $0.87 in the character of quarterly dividends, representing a 3.15% annual yield.
Improved recovery of resources in mature fields, strong exploration results, and oil discoveries in Flemish Pass Basin, offshore Canada and near Norne, coupled to a gas discovery made in north of Asgard and interests bought in Australia and Norway, returns strong long-term prospects for Statoil. Management has also made public the intent of achieving an equity production of above 2.5 million barrels of oil equivalent in 2020. Growth will come from new projects throwing a compounded annual growth rate of 2-3% for the 2012-2016 period, and 3-4% for the 2016 2020 period.
Other highlights for future long-term growth is Statoil’s innovation and use of technology in exploration and production, guaranteeing the exploitation of deepwater found reserves. Also, proximity to Europe secures the company a share of the growing demand for gas, as countries strive to meet new emission regulations while generating electricity.
The sales done by David Dreman (Trades, Portfolio) and Renaissance Technologies are not trivial. Stock price has reached the maximum levels recorded since 2007, a moment when stock is expected to fall. Both parts are securing part of the investment. At the same time, the small sale done indicates the faith of a strong future for the stock, giving support to a long-term investment strategy on this stock.
Disclosure: Vanina Egea holds no position in any of the mentioned stocks.